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By Pam Leibfried
Homebuyers who are new to the mortgage process are often confused about the difference between being prequalified for a mortgage and being preapproved for one.
Even long-term homeowners who are now looking to downsize may be a bit rusty on the terms if they haven’t gone through the mortgage process in years, if not decades.
Although many buyers tend to use the terms interchangeably, they’re not exactly the same thing.
When you get prequalified for a mortgage, it means that your lender has provided an estimate of the amount you can afford to pay for a house based on information that you give them (credit score, income, assets, and debts).
It is important to know that a prequalification is an informal process; it does not represent a commitment on the part of the lender to loan you the amount for which you prequalified.
Why? Because the prequalification analysis is just a rough estimate. It gives you an idea of what you can afford and helps ensure you aren’t out looking at $500,000 houses when you can only qualify for a $300,000 mortgage. It also gives your realtor a ballpark price range for selecting houses to show you and reassures them that you’re a legitimate buyer.
The prequalification process can take place over the phone or in person – and some lenders let you prequalify online. Once the lender has completed their initial assessment of your finances, they’ll provide you with a prequalification letter listing the estimated home value you can afford.
When you get preapproved for a mortgage, the process is more involved and more formal than the prequalification process. Rather than basing their evaluation of your creditworthiness on information that you tell them, the lender runs a detailed credit check and asks for proof of your assets and income. Typically, you’ll be asked to provide copies of the following:
This documentation and the lender’s research of your credit history will enable them to be more confident about the likelihood your mortgage will ultimately be approved once you find your dream house. But it’s important to be aware that a preapproval does not guarantee the lender will definitely loan you the preapproved amount of money.
A preapproval is a more accurate estimate than a prequalification, but it is not a final mortgage approval. During the time between the preapproval and your closing date, your finances could change, there could be a problem with the appraisal or inspection, or interest rates could change, among other issues.
And preapprovals have a shelf life, so your preapproval could expire before you even find your dream home. And given that the average buyer spends a couple of months house hunting before finding the home they want to buy, it’s not unlikely that an early preapproval will expire before you’re ready to buy. Once your preapproval expires, you’ll have to go through the entire process again.
It’s best to avoid repeated preapprovals for a couple of reasons. First, it’s sort of a pain. And second, repeated loan preapprovals can affect your credit score negatively. If your credit score is not absolutely stellar, even a small dip from repeated preapprovals could bump you to a higher mortgage interest rate.
At Alliant, we sort of split the difference between the typical prequalification and preapproval processes. We do a prequalification (the quicker, simpler process), but our prequalifications include a full mortgage application and a credit report. Alliant also does an initial underwriting review to get a good picture of your financial situation.
We’ll ask you about your income and savings, too, but we won’t require you to provide us with documentation of them until after you’ve actually found a home.
Running the credit check as part of the prequalification has advantages versus waiting until you’ve signed a contract. For example, it gives you more time to address any issues or mistakes on your credit report before you buy. And fixing those issues before finalizing your mortgage may even qualify you for a lower interest rate!
And that leads me to one of the most critical pieces of advice we can give to someone who is looking to buy a home: Review your credit report thoroughly. Knowing that your credit is in order will make the entire mortgage process go much more smoothly.
Pam Leibfried is a marketing content specialist whose love of words led to a writing and editing career. After a brief stint teaching English, she transitioned to corporate communications and spent 20 years at The Nielsen Company before joining Alliant’s content development team. Early in her work life, Pam’s friend Matt explained the benefits of a 401(k) and her dad encouraged her to start a Roth IRA. Their good counsel prompted her to prioritize retirement savings, which just might enable her to retire early so she can read more and live out the slogan on her fave T-shirt: “I have a retirement plan: I plan on quilting.”